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How ERCOT's Monitor Views Texas Market's Performance on Prices
and all of them over a 10-year time frame – would be optimal. But critics claim RGGI-type schemes offer too many permits, with little incentive for big polluters to change their business practices. Clearly one needs to start somewhere, and learn as one goes along. RGGI appears to be well on that path. Several Midwestern and Western states are engaged in a similar path, with the latter discussing a 15 percent GHG cut from 2005 levels by 2020. California, of course, has passed a law that requires statewide emissions – not just from power plants and large industry – to be reduced to 1990 level by 2020, a far more ambitious target compared to RGGI. & doi:/10.1016/j.tej.2008.11.009
How ERCOT’s Monitor Views Texas Market’s Performance on Prices Like people, electricity markets have their peculiarities, and that is what makes them interesting. Yet, it is important to examine how well they function, not only by looking at factors such as the state of competition within a given market and issues like concentration among major players, but also comparing prices across markets with similar features. Most markets have an internal or external market monitor that serves this function regularly. In Britain, for example, the Office of Gas and Electricity Markets (Ofgem), periodically reports on the performance of the market. In the U.S., each organized wholesale market has a watchdog, some internal to the organization, some independent. Opinions vary, but most experts believe that an independent market monitor not reporting to the management of the grid operator will be in a better position to pass judgment and certainly less hampered in being critical when needed. In the U.S., PJM Interconnection LLC and the Electric Reliability Council of Texas (ERCOT) currently meet this criterion, with the former’s monitor gaining its independence following a messy divorce from the parent organization. ERCOT’s market, which has come under a lot of criticism lately for behaving erratically, is monitored December 2008, Vol. 21, Issue 10
by Potomac Economics, a consultancy specializing in such matters. Its most recent state-of-the-market (SOM) report covers everything you always wanted to know about ERCOT but were afraid to ask, and then some. Most interesting is a comparative analysis of the market clearing prices (MCP) in five organized U.S. wholesale markets. The prices given are all-in prices, which include energy – the dominant portion in all cases – plus ancillary services, uplift and/or out-ofmerit resources such as reliability-must-run (RMR) and other. Some markets also have capacity payments, which are also included. Despite their many obvious and some no-soobvious differences, ERCOT’s prices appear to be in line with those of the California Independent System Operator (CAISO) and the vastly larger and coal- and nuclear-dominated PJM, with somewhat higher prices for New York ISO and ISO New England. There are perfectly good reasons why prices in different regions differ as they do – and some of these differences are due to capacity prices in the Eastern markets. Texas and California are energy-only markets. Grid operators prefer stiff competition among generators, resulting in low and stable prices. Generators, as everyone knows, have a rather different perspective. For a market to be sustainable in the long run, however, prices must be sufficiently high to allow generators not only to recover their costs but to be encouraged to invest in new capacity to meet growing demand. This is a tough balancing act, especially for generators with peaking units. These units, which typically set the marginal prices, must recover sufficient revenues to remain viable. Lower-cost baseload units are paid the same prices but run many more hours. If net revenues are low, there is little or no incentive to invest in additional peaking capacity – a problem in many markets. Here the picture is more mixed, again due to different generation mix and market rules. Markets with capacity payments – depending on how constrained they are – pay a premium at times of scarcity. Some markets exhibit falling price trends, while others are moving in the opposite direction. & doi:/10.1016/j.tej.2008.11.010 1040-6190/$–see front matter
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How ERCOT’s Monitor Views Texas Market’s Performance on Prices Like people, electricity markets have their peculiarities, and that is what makes them interesting. Yet, it is important to examine how well they function, not only by looking at factors such as the state of competition within a given market and issues like concentration among major players, but also comparing prices across markets with similar features. Most markets have an internal or external market monitor that serves this function regularly. In Britain, for example, the Office of Gas and Electricity Markets (Ofgem), periodically reports on the performance of the market. In the U.S., each organized wholesale market has a watchdog, some internal to the organization, some independent. Opinions vary, but most experts believe that an independent market monitor not reporting to the management of the grid operator will be in a better position to pass judgment and certainly less hampered in being critical when needed. In the U.S., PJM Interconnection LLC and the Electric Reliability Council of Texas (ERCOT) currently meet this criterion, with the former’s monitor gaining its independence following a messy divorce from the parent organization. ERCOT’s market, which has come under a lot of criticism lately for behaving erratically, is monitored December 2008, Vol. 21, Issue 10
by Potomac Economics, a consultancy specializing in such matters. Its most recent state-of-the-market (SOM) report covers everything you always wanted to know about ERCOT but were afraid to ask, and then some. Most interesting is a comparative analysis of the market clearing prices (MCP) in five organized U.S. wholesale markets. The prices given are all-in prices, which include energy – the dominant portion in all cases – plus ancillary services, uplift and/or out-ofmerit resources such as reliability-must-run (RMR) and other. Some markets also have capacity payments, which are also included. Despite their many obvious and some no-soobvious differences, ERCOT’s prices appear to be in line with those of the California Independent System Operator (CAISO) and the vastly larger and coal- and nuclear-dominated PJM, with somewhat higher prices for New York ISO and ISO New England. There are perfectly good reasons why prices in different regions differ as they do – and some of these differences are due to capacity prices in the Eastern markets. Texas and California are energy-only markets. Grid operators prefer stiff competition among generators, resulting in low and stable prices. Generators, as everyone knows, have a rather different perspective. For a market to be sustainable in the long run, however, prices must be sufficiently high to allow generators not only to recover their costs but to be encouraged to invest in new capacity to meet growing demand. This is a tough balancing act, especially for generators with peaking units. These units, which typically set the marginal prices, must recover sufficient revenues to remain viable. Lower-cost baseload units are paid the same prices but run many more hours. If net revenues are low, there is little or no incentive to invest in additional peaking capacity – a problem in many markets. Here the picture is more mixed, again due to different generation mix and market rules. Markets with capacity payments – depending on how constrained they are – pay a premium at times of scarcity. Some markets exhibit falling price trends, while others are moving in the opposite direction. & doi:/10.1016/j.tej.2008.11.010 1040-6190/$–see front matter
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